Stagnant margin structure a big problem of F&G retail

Running a successful supermarket operations these days is not easy. Especially when competition from big national chains and online players is intensifying every day. So with the going getting tough, how do supermarkets keep their business from falling away?

Manan Gada of Society Stores, Mumbai, talks about a failsafe strategy for supermarkets to grow both their top line and bottomline at a decent clip

Progressive Grocer speaks to Manan Gada of Society Stores, Mumbai, about a failsafe strategy for supermarkets to grow both their top line and bottomline at a decent clip.

“Retail supermarkets have paper-thin 16-18 per cent gross margins and these are becoming even more razor-thin as the cost of operations are rising every year. So we have to play the turnover game – the faster the stock rotates, faster the store is able to make money,” says Gada who discusses, among other things, his sourcing and vendor strategy, focus on in-store brands and his expansion game plan via the brick-and-click online model…

How would you describe the growth journey of your stores over the years and its course of trajectory going forward?

Society Stores was started by my grandfather Ratanshi Gada in 1969 in Santacruz West, Mumbai. My father, Laxmichand Gada soon took over the management of the store in 1975 at a very young age. We continued serving best quality groceries and supplies as a traditional kirana store till 1997. That’s when we took the first leap towards technology and modern supermarket format. The whole store underwent a complete renovation to become a modern, self-serving supermarket – a concept that was quite new at that time. We were probably amongst the first in the supermarket category in Mumbai to go fully computerised and install barcode systems.

The store got revamped again in 2004 and 2010 as we believe in providing best shopping experience to our customers.

In October 2014, our second store was inaugurated in Lokhandwala, Andheri West, Mumbai, and are now planning more physical stores in the future to take the business ahead.

Which retail format do you stores come under?

Society Stores is a supermarket, which offers a plethora of products and convenience to the customers and where consumers can find all their daily needs’ products under one roof. Thus, we can also categorise our stores under the Convenience Mart format.

What is the location strategy for your stores?

Location for any retail supermarket is of utmost importance. Marketing costs reduce drastically for a store at a prime location. Residential areas with multi-storey towers and societies make good locations for convenience stores.

What is the average size of your stores?

Average store size is 1,500 square feet. The Santacruz store is a little smaller at 1,200 square feet while the Lokhandwala store is 1,800 square feet.

How much investment is required for setting up such stores?

Well, to give customers a warm ambience and an excellent shopping experience, investing in good interiors and maintaining a proper inventory is vital. Th ]erefore, the total investment that goes into setting up a new store ranges between Rs. 1.00 – 1.25 crore depending on the size of the store. The bigger the size, bigger the investment.

Tell us about the product range available at your stores.

Almost all the brands and their SKUs that are available in the market – Indian and imported – are available with us. Apart from all the different specialty and gourmet food products that we specialise in, we also make sure to stock various products in the personal and household care categories. Basically, we try and cater to everything a person needs after s/he wakes up in the morning to the time s/he goes to bed at night. For example: if you are planning pasta for dinner, our staff will assist you in shopping for diff erent types of pasta, sauces, basil leaves, cheese, bell peppers and some Italian seasoning as well!

What is the SKU count in your stores?

We have about 9,000 SKUs in each store.

What is the price range for products at your stores? Which price band is the most popular with customers?

At Society Stores, customers can choose from products like Parle-G biscuits, which start at a price point of Rs 5 to expensive protein supplements that may cost around Rs 10,000. We stock an interesting mix of product categories, but it is difficult to comment on the product price band that is popular with customers.

What is the sales velocity (sales per square feet) for your stores?

Our current sales per square feet is INR 125 per day, up by 12 per cent from last year.

Which are the new and emerging categories at your stores?

Health and organic food is one of the fastest growing categories today. People have already started consumption of different super-foods like quinoa, chia seeds, fl ax seeds, pumpkin seeds, sunflower seeds, gluten-free, lactose-free products and a lot more. All these were unheard of a couple of years back. This means that the consumers have started investing in their health so that they can enjoy the returns in the future.

What are your processes and criteria for identifying new products?

Before approving a product and placing it on the shelves, we sample it along with our staff. We together take a judgment call on how the product fits in with the market trend and whether it adds value to our customers’ lifestyle.

How liberal are you in trying out new offerings in your stores and in encouraging new brands?

Young brands developed by entrepreneurs are always welcome! We encourage them to promote their products at our stores and make sure that customers are educated about the product. We have always believed that every time a customer enters our stores, he/she must be able to find some new product. This not only engages the customer with our store but also creates curiosity in the customers’ mind as to what new product will they find this time!

What are your plans for category expansion and introducing new products?

New products are launched into the market almost every day. Therefore, it is important for us to keep track of what’s new and what value can they add to our customer’s lifestyle. If it is something important, we make sure we have it on our shelves! For example, specialty foods such as organic, gluten-free, lactose-free and sugar-free products. Although these are a little expensive, customers have now started to prefer organic groceries. With organic fruits and vegetables also gaining popularity, we are planning to introduce them too. Similarly, customers who are allergic to gluten, lactose-intolerant or have diabetes, have no choice but to consume gluten-free, lactose-free or sugar-free products respectively.

Are you also looking at shop-in-shop too?

Convenience stores, being small in area, always have to deal with the space constraint, and more so with new products hitting the market every day. Taking into account these considerations, setting up a shop-in-shop is a little difficult. However, if there is space and introducing a product category adds to the value of a store, one must never rule out the shop-in-shop concept.

What is your strategy for merchandise display and category management?

“Jo dikhta hai wo bikta hai”. What the customer sees, the customer buys! We give maximum front-end displays to products on our shelves. When a customer strolls through the store, most of his/her shopping list is checked by just picking up from the shelf. Most of the impulse purchases happen this way too! Finally, retail is all about rotation of stock inventory. Faster stock rotation means fresher products for your customers and higher returns on investment! Therefore, we make sure that slow moving products are continuously monitored and replaced with new products that can promise quick rotation.

What is your brand positioning across your customer base? What is the typical customer profile of your stores and has it been changing over the years?

Our brand positioning is of a premium convenience store where one can shop for all the daily needs’ products under one roof. A major chunk of our clientele is HNI customers ranging from kids to senior citizens. There are many customers whom we have been serving since three generations! Over the years, a lot has changed. Earlier, customers used to buy their complete household needs at the beginning of the month. Today, the modern-day-customer prefers convenience over everything else. They prefer refilling their needs from time to time rather than stock up for the whole month.

Tell us about the customer feedback loop at your stores and if it has helped to improve various facets of store operations.

Customer feedback is always vital for any retail store. We see negative feedback as stepping stones for offering even better services. We mostly engage with our customers for feedback at the point of sale because that’s when they have a few seconds to spare while checkout. In case a customer gives us a negative feedback, we personally make sure that the issue is resolved immediately and later follow-up with the customer if he/she is satisfied with our services. This restores the customer’s faith and trust in the brand!

Which are the elements that have become the hallmark of your stores?

At Society Stores, we provide all the daily needs of our customers under one roof at their convenience. We like to add value to our customers’ lifestyle by saving their precious time so they do not have to frequent other stores to complete their shopping list! Secondly, the personal touch that we share with our customers works wonders. Being in business for 47 years, we have been serving many families for over three generations now. I believe the warmth and the comfort level our customers share with us is a huge asset to the organisation.

Do you have tie-ups or collaborations with brands for category insights and better category management?

Supermarkets and brands are the two most important pillars of the retail industry. Brands cannot work without retailers and vice-versa. Th us, collaborations between retailers and brands are necessary as both have the same goal: to generate revenue and profit from it!

We have interactions with many brands where we discuss different strategies for different product categories. For example, we support them by placing their products at prime spots while they support us with various offers and schemes. In the end, everybody wins!

Which have been the instances where you have partnered with brands to build new categories and what has been the outcome?

We have partnered with brands multiple times, resulting in fantastic sales and repeat customer purchases! We provide brands with maximum footfalls, giving them a chance to woo the customers with their products through sampling and promotional activities.

A few months back, promotional activity for Puck cheese spreads was being carried out at our stores and the results were brilliant for both of us. Similarly, currently we are carrying out sampling activities for Go Almette; customer response has again been phenomenal and sales have gone through the roof. Judging from the success of such activities, we believe that despite crores spent by brands on ATL activities, small BTL activities such as in-store promotion and sampling can provide far greater returns on investment!

What is the typical return for retailers in this business? How much time does it take for a store to break even?

Retail supermarkets have paper-thin margins. And now, with the increase in competition from the big national chains and online players, the margins are now becoming razor-thin. Typically, supermarkets operate at about 16-18 per cent gross margins. Finally it is a turnover game – the faster the stock rotates, faster will the store break-even. After huge investments into setting up the supermarket and big marketing budgets, a store should typically start making profits in 3-4 years as the cost of operations keeps rising every year.

What are your expectations from food producers and brands and how can they become true category partners with retailers?

To be honest, there are very few FMCG brands that retailers are happy doing business with. These are the ones who offer handsome margins and believe in a win-win situation by helping the retailer grow too. And then there are most of MNC consumer companies which offer razor-sharp gross margins of 8-9 per cent and additional schemes of 2-3 per cent (the calculation of which is never transparent).

In a city like Mumbai, where rentals, electricity expenses and labour is sky high, the cost of store operation itself is about 10-12 per cent. All MNCs spend crores in television, newspaper and mass radio advertisements but have extremely tight budgets for retailer margins, in-store promotion and other BTL activities. Eventually, it is the retailer who will be selling their products and it is the retailer’s compulsion to do business at such low margins because customers will always demand FMCG products!

The cost of operations has gone up; even the cost of FMCG products are not the same as they used to be 10 years back; however for some reason, the margin structure still remains the same! This is one of the biggest problems of our Indian Retail Industry and will continue to hamper its growth if not solved.

The Retail Industry in the United States, UK, Germany, France and other developed nations have become organised and matured over the years because they enjoy handsome margins, which enable them to invest in technology and systems that ultimately ensure smooth operations.

To enable healthy development of the Indian Supermarket Retail Industry, it is essential for brands to partner with retailers in a win-win situation.

What is the sales split between private labels and national brands?What is your pricing strategy for private labels?

If I compare the private label brands and national brands head-on in the same category, our customers prefer private brands because of the warm bonding they share with the store. Customers are assured products of the finest quality at reasonable prices because of which the sale of private brands is higher.

What is your private label strategy? In which categories do you have private labels? What kind of margins do they give compared to national brands?

Private label brands are extremely vital for any supermarket for mainly two reasons. Primarily, they serve as bond of faith and trust between the consumer and the supermarket. Second, they are margin boosters for the retail industry, which otherwise has paper-thin margins. We believe that private labels are a retail store’s identity. Every supermarket stocks merchandise from the same national brands; private labels make the stores stand out!

Currently, we have private label brands in groceries, spices, dry fruits, fruits & vegetables, Indian snacks, breads, biscuits and cookies. The margins are definitely higher as compared to their national counterparts.

What are you doing to promote your private label brands?

Currently, our private label brands mainly cover food categories, which I have mentioned earlier. To increase the revenues of private brands, we make sure that the products are not lost in the large number of SKUs that we stock. Thus, we have come up with attractive packaging that screams out to the customer to be picked.

Moreover, we carry out various in-store sampling activities, which bring the customers closer to the brand and convert him/her into a consumer.

How much of sales turnover do they contribute?

Well, since our private label brands are introduced only across food products currently, they contribute about 18 per cent of our sales.

What has been the growth in this category? Which new products would you like to introduce in this category?

By introducing new categories in our private brands, sales have scaled new heights year-on-year. Therefore, now we are planning to introduce our private brands in the household care section too.

Have you developed your own loyalty programme or planning to introduce any scheme for pushing your private label sales?

We are in the process of developing a CRM system wherein we can go an extra mile to produce customer delight. We are expecting fantastic results once the programme is in place.

Which are the promotional activities at your stores and how successful have they been?

Being in the supermarket category with international, Indian and gourmet food products as our specialty, I believe there’s no better strategy than in-store sampling! When we carry out these promotional drives, we make sure that the customer is educated about the ingredients and tries a sample. This initial one-on-one engagement with the customer is extremely crucial because it then leads to the most powerful marketing strategy: word-of-mouth. We have also designed many strategies based on cross-selling of different products and brands but nothing works as well as in-store sampling!

Promotions are carried out based on different seasons. For instance, different sorbet and juices are promoted in the summers while biscuits, cookies, dips, sweets and fresh Indian snacks can be promoted throughout the year.

Apart from in-store promotions, any other brand-building ATL activities?

Brand building is a never ending process! A successful brand is a byproduct of customer satisfaction and visibility. We have run quite a few campaigns through mass media such as newspaper and different social networking websites. However, we have experienced that in-store activities and promotions work wonders and has a higher return on investment.

Having a broad and diverse supplier base is critical these days given the fact that consumers are looking for products that offer higher levels of satisfaction. What are you doing to rope in more quality suppliers for different categories?

Having a quality supplier base is an asset for any retailer, big or small. Good business relations take time to build; they cannot be forged overnight! We understand that our vendors too, work on paper thin margins and rely solely on quick rotation of stocks. Therefore, unlike many modern retailers, we always make payments to our suppliers against delivery, long before the due date. This helps develop a feelgood-factor between both the parties and marks the beginning of an ever-lasting relationship.

What is your current supplier base and at what rate is it growing?

Currently, we have about 450 vendors serving our stores and this base is increasing year-on-year by about 9 per cent.

How do you ensure that suppliers stick to quality standards and efficiency norms?

We are quite vigilant when it comes to receiving goods from our vendors. Product packaging and all manufacturing/expiry dates are checked thoroughly before receiving the products. Being a modern store with all the systems in place, we are always able to track different inventories and replenish our stocks before they run out! Purchase orders with all product details are raised to all vendors so that there is no room for misunderstandings.

What is the extent of your direct sourcing and how do you do it? Are there specific product categories where direct form of sourcing is a better approach? Financially, which is a better approach – direct sourcing or sourcing through suppliers?

Most of our Indian food specialties are sourced directly from the manufacturers, where we can collaborate with them and fine tune their recipes according to our standards, which our customers actually prefer. For small and medium scale businesses, we believe sourcing through vendors works best for most products. Only after reaching a certain scale, direct sourcing from manufacturers becomes practically feasible. We however have a soft corner for sourcing from our vendors for two major reasons. Primarily, we are both helping each other to grow our businesses. Secondly, we would rather focus on our strength – maximise sales and revenues, leaving supply chain and logistics to our vendors, which is their strength.

Are there any interesting concepts or innovations you have introduced at your stores?

We have a bell at our checkout counters which every happy and satisfied customer rings after billing. The ringing of the bell not only brings positivity in the entire store but also encourages and motivates the staff, which is an added benefit. Moreover, recently we have also started our new category of hot-n-fresh food and Indian snacks. Coupled with sampling and in-store promotion, the response in this category has been fantastic and has also become a footfall driver!

With e-commerce and m-commerce pulling ahead as more convenient mediums of shopping, are you doing anything special to beef up your presence on these channels? How do you see these channels evolving and how will they impact modern retailers?

The e-commerce market in India is booming and providing a great platform for customers where products meet convenience. To offer an added convenience to our customers, we too are working on a brick-n-click model where a customer can place an order with us online, through our helpline or simply WhatsApp their shopping list to us! If the basket is small, ordering on an app or a website makes sense.

But if one has to order groceries in bulk worth Rs 8,000- 10,000, a helpline order or a WhatsApp order would be much quicker, convenient and efficient. The e-commerce industry in India will take time before it matures the way it has in the Western markets. Th is industry right now is at a very nascent stage and is completely dependent on cash flows from investors and VC funding. Businesses (although they take time to break even) are designed and built to generate revenues and profits, not for booking losses and gaining valuations!

E-commerce companies booking losses worth hundreds of crores today and gaining valuations worth billions of dollars, is something that defies the very definition of business profits. Thus, the e-commerce industry is in a dire need of a model that does not depend on price wars and at the same time it is sustainable too! However big the online retail industry becomes, the bricks-and-mortar stores are here to stay! India is home to a large population and not all prefer to shop online.

Even though the e-commerce industry is growing at a rapid rate as compared to the offline stores, it still forms a small percentage of the total supermarket industry! Statistics confirm that even in the Western countries like the United Kingdom, where internet penetration is quite high as compared to India, the supermarket e-commerce industry is still just 6-7 per cent of the total food and grocery retail!

Similarly, online food and beverage sales in the United States for the year 2018 is estimated at about $18 billion, whereas the sales offline is expected to hit more than $750 billion (online share is not even 3 per cent of the whole pie). Agreed that the offline retail stores do feel the pinch of the presence of their online counterparts today, but how long will the latter keep burning cash?

What is your expansion strategy? Are you looking for franchise stores too?

Having a conservative retail background, we believe in taking one step at a time. Th erefore, currently we are looking at expansion only in Mumbai. Currently, we are more focused on reaching out to customers by setting up more physical stores and then slowly expanding online.

The last few years have completely revolutionised the way we purchase groceries. In this busy life, everyone prefers convenience. Therefore, we are planning to come up with more physical stores in Mumbai and work on our brick-and-click online model side by side. Franchising a multi-brand food and grocery store is quite difficult as compared to franchising a fast-food restaurant. However, if we find a franchisee whose DNA matches ours, we can consider setting up stores in different metros of the country.